Canadian Quarterly Earnings Pulse - Q3 2022

5i Staff Dec 01, 2022
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This week, we continue to summarize the broader pulse of public Canadian companies by looking into another set of quarterly earnings (previous post). 


Below, we highlight the Macro, Industry and Corporate trends that we have observed along with quotations from 5i coverage company executives. In this weeks Earnings Pulse, we note underlying themes of high financing cost, a strong US dollar impacting financial results, executives’ views on global economic slowdown, and macro environment uncertainty driven by tight monetary policies, easing inflation, and supply chain pressures.


One of the most significant monetary policy tightenings in the last 40 years

“Inflation has resulted in the most significant monetary policy tightening that we've seen in the last 40 years, but we're still in pretty good shape here. We have built-in inflation protection for about 80% of our EBITDA, with total escalators or the ability to capture higher costs increases through rate filings.” – Enbridge Inc. (ENB) CFO, Vern Yu


Supply chain issues have subsided leading to a more positive outlook

“The supply chain issue that impacted their ability to close our jobs earlier in the year has subsided and the business is now firing on all cylinders. Ainsworth continues to benefit from a record backlog as they are booking new business as fast as they are billing. The outlook for Ainsworth remains positive as the business enters into the fourth quarter, which is traditionally a very strong quarter.” – GDI Integrated Facility Services (GDI) President and CEO, Claude Bigras


The strong US dollar creates a short-term tailwind for Canadian companies

“From a financial perspective, the U.S. dollar strengthening has provided a slight tailwind. In contrast, we expect Energy Services to remain a headwind for the balance of the year. Additionally, we're seeing some pressure from higher power costs driven by both higher throughputs and higher power prices.” – Enbridge Inc. (ENB) CFO, Vern Yu


2022 has been full of uncertainties and challenges for companies

“In conclusion, I would like to say again that I'm very pleased with the performance above the business unit. We are operating in an environment with many challenges and a good deal of uncertainty. But it's related to incredibly tight labor markets, the unprecedented reimaging of the office environment and our historic move in interest rates caused economic uncertainty. – GDI Integrated Facility Services (GDI) President and CEO, Claude Bigras


…which creates challenges for businesses to predict what the future environment will look like

“More specifically to Descartes, there's new leadership in the U.K., which influences the uncertainty around the post-Brexit customs and security filing requirements for goods coming into Northern Ireland. There also seems to be a lot of uncertainty around the state of the global economy. Some countries are seeing reduced growth or recessionary economic signals. Interest rates have risen steadily as central banks try to get inflation under control. Fuel costs have also increased.

And in some geographies, there have been energy shortages, particularly in Europe, where energy and commodities have been impacted by the war in Ukraine. This economic uncertainty creates challenges for our customers and for Descartes to predict what the future business environment will be like.” – The Descartes Systems Group Inc. (DSG) CEO, Edward Ryan


The war in Ukraine leads to higher energy prices globally

“In addition, society's climate change ambitions and the war in Ukraine are driving up energy prices creating challenges for households globally. Enbridge is well positioned to navigate through these risks, and I'll cover that off now.” – Enbridge Inc. (ENB) CFO, Vern Yu


Environmental, Social and Governance (ESG) has become increasingly a dominant theme across industries

“We are still at the beginning stage of this journey, but we have already seen progression in our analysis, understanding, management and enhancement of our corporate effort in all aspects of ESG. The second annual report illustrates our goals are taking root and growing with ESG quickly becoming an everyday topic of discussion and an important aspect of our GDI culture – GDI Integrated Facility Services (GDI) President and CEO, Claude Bigras


Higher inflation leads to higher inventories levels

“Higher inventories this quarter were also due to the impact of inflation on unit costs as well as higher raw material and work in process levels given broader supply chain constraints. – Gildan Activewear Inc. (GIL) Executive Vice Present, CFO, Rhodri Harries


…and slight margin compression due to labour cost

“We incrementally continue to close our year-over-year margin comparison with the current quarter EBITDA margin yielding 10.4%, 30 basis points lower than the 10.7% in last year's Q3. The margin was influenced by a higher mix of the labour-based services that Scott referenced earlier as driving our growth compared to higher-margin ancillaries. – FirstService Corporation (FSV) CFO Jeremy Rakusin


However, slowing global economic growth does not seem to impact shipment volumes yet

“First, we're seeing strong volumes. In Q2, we continued to see strong shipping volumes across our Global Logistics Network in all modes of transportation. In July, public information shows that there were again record ocean imports into the United States when compared to year-ago statistics. So while there are many concerns about the global economy, it doesn't appear to be making its way into shipment volumes yet. ” – The Descartes Systems Group Inc. (DSG) CEO, Edward Ryan



Commercial office cccupancy rates have recovered to pre-pandemic levels driven by a diverse clients base

“Our Canadian business to continue -- continuing to perform well as we work with our Class A and corporate clients to support their needs in a dynamic office environment. Our clients and markets as such education, industrial, health care and hospitality have generally returned to pre-pandemic occupancy levels. Integration of IH service is continuing to go very well. Our teams are working well together, and we are sharing client relationships and best practices– GDI Integrated Facility Services (GDI) President and CEO, Claude Bigras


Utility is a non-cyclical industry through all market cycles

“Our commercial underpinnings give us resiliency and predictability of cash flows through all market cycles, and our balance sheet is strong. And you've seen again this quarter, we have an increasing inventory quality organic investments that will drive growth well into the future. So Enbridge is well positioned, not just to withstand volatility, but to grow and thrive in any environment. And Vern is going to expand on this a little bit later.” – Enbridge Inc. (ENB) President and CEO, Al Monaco


…of which renewables are the future of global energy consumption

“Now to Renewables. Just like natural gas, it's clear that Renewables will be a bigger part of the global energy supply mix. Our European offshore wind business is growing nicely and we've got strong commercial and execution teams in place and great partners. In fact, we've got the Saint Nazaire project coming on later this month with first power. But there's another big opportunity to accelerate our North American business, driven by a host of factors, including Renewables targets and policy actions we've seen lately.” – Enbridge Inc. (ENB) President and CEO, Al Monaco


Healthy demand despite recessionary concerns, combined with tight commodity supply drive a better outlook for utility companies

“Typically, with the recession, you see demand destruction. But we are continuing to see strong energy fundamentals with tight supply and demand dynamics. Supply-wise, we expect further tightening given the recent OPEC+ production cuts, the ban on Russian oil and the wind down of SPR releases. Demand-wise, Enbridge has connected the best demand [ pull ] markets for both crude oil and natural gas. In addition, we have strong commercial underpinning that drive predictable cash flow and global energy security concerns are leading to more investment opportunities for us.” – Enbridge Inc. (ENB) CFO, Vern Yu


Vertical integration creates resilience for apparel

“Despite tough retail and international markets, the strength of our vertically integrated manufacturing model and the resiliency of our large core imprintables activewear business is clearly differentiating us and driving our ability to deliver. So during the third quarter, we generated sales growth of 6% over record sales last year. – Gildan Activewear Inc. (GIL) Executive Vice Present, CFO, Rhodri Harries


…driven largely by recovery in travel, tourism and large events leading to sales growth for activewear brands

“Despite the challenging environment, we are pleased with the sales performance we were able to deliver in the quarter as travel, tourism, large events and the everyday use and replenishment nature of our products continue to drive underlying demand and offset softer retail market conditions.” – Gildan Activewear Inc. (GIL) Executive Vice Present, CFO, Rhodri Harries


Wealth and asset management are impacted by the decline in global equity markets

“These strong results driven by our protection and health businesses were offset by lower income in wealth and asset management, which were impacted by declines in global equity markets. Our asset management businesses have strong fundamentals, focused on delivering strong performance and returns to our clients. MFS is a top 10 equity manager in the U.S. retail space with a long track record of strong performance. SLC Management, our alternative asset manager, continues to generate strong flows and crossed $200 billion of assets under management in the quarter.” – Sun Life Financial Inc. (SLF) President and CEO, Kevin Strain


…However, growth in Assets Under Management (AUM) and capital raising activity remain strong

“Fee-related earnings were up 12% from the prior year, reflecting higher fee income driven by strong capital raising activity and the deployment of capital into fee-earning AUM. Capital raising of $3.8 billion in the quarter was driven by positive inflows across all asset classes. Total AUM includes approximately $22 billion that is not yet earning fees. Once invested, these assets will generate annualized fee revenue of more than $180 million.” – Sun Life Financial Inc. (SLF) Executive Vice President and CFO, Manjit Singh


Supply chain management software is a beneficiary of the supply chain crisis over the last few years

“As supply chain challenges have heightened over the past few years, knowing the locations of goods in transit has become even more critical, regardless of mode of transport or geography. Location information is now key input for critical decisions being made by businesses every day looking to build efficient, flexible and resilient supply chains. Our real-time visibility solutions performed very well in the quarter as they continue to expand and strengthen by mode and geography.” – The Descartes Systems Group Inc. (DSG) CEO, Edward Ryan


…and is becoming increasingly crucial for businesses to operate efficiently

“Second is strong demand for our optimization solutions. We've long been a leading provider of market-leading delivery optimization solutions. Whether customers have their own fleet of vehicles or are using third-party transportation, we have solutions to make the most efficient use of limited resources. These optimization solutions allow our customers to plan deliveries while considering what's most important to their business and customers. It can be the lowest-cost deliveries, deliveries within a certain time window, deliveries that avoid driver overtime, routes that use the least amount of mileage, choosing transportation providers who have the most environmentally-friendly footprint or any combination of those types of items.” – The Descartes Systems Group Inc. (DSG) CEO, Edward Ryan



Commercial office occupancy rates have remained stable in 2022

“Our Janitorial business in both Canada and the U.S. continues to perform well. In Canada, we are seeing relative stability in commercial office occupancy rates relative to Q2 of this year, as most tenants have rolled out bespoke return to work policies for the staff, and we are working accordingly. – GDI Integrated Facility Services (GDI) President and CEO, Claude Bigras


Despite an increase in interest rates, the pipelines for growth projects that require significant capital are still healthy

“On to the business update. In Gas Transmission, we've got roughly $10 billion of projects in execution, including our annual modernization program and recently secured projects. Gulfstream Phase 6 is now in service. We reached a rate settlement on our BC system and a good TETCO customer settlement. We're seeing strong throughput throughout our systems.

In Gas Distribution, we've got $3.5 billion underway, and we'll have 5 of the 27 new community expansions done by year-end. Earlier this week, we filed our utility rebasing application that will establish rates through 2028. You can think of this as carrying on under incentive rates. And we sanctioned 2 new RNG projects in Ontario.” – Enbridge Inc. (ENB) President and CEO, Al Monaco


High-quality recurring revenue

“The first is what parts of our business did well during this past quarter. The second is some focus for running our business, and thirdly, acquisitions. On the first point, our focus at Descartes remains on building a consistent, predictable and sustainable business that is resilient to changes in market conditions. We're operating our business for the long term and strive to keep customers for life. – The Descartes Systems Group Inc. (DSG) CEO, Edward Ryan


…and a well-capitalized balance sheet lead to strong operating results despite foreign exchange headwinds

“Our revenues would have been $3.9 million higher if we'd used last year's FX rates or $1.7 million higher if we'd used last quarter's FX rates. Allan will go into this in more detail later. However, strong results that would have been even stronger in a different FX environment. At the end of the quarter, we had $189 million in cash, and we're debt-free with an undrawn $350 million line of credit.

We remain well capitalized, cash-generating, debt-free and ready to continue to invest in our business.” – The Descartes Systems Group Inc. (DSG) CEO, Edward Ryan


…allow companies to play offence in M&A opportunistically

“We have the resources to be acquisitive. We have a strong balance sheet with almost $190 million in cash, a $350 million undrawn line of credit and an unlimited shelf perspective that can be leveraged if additional capital is needed. We also have a track record of successfully finding, executing and integrating acquired businesses. We have a passionate employee base who often have either joined or participated in our prior acquisitions. We're an ideal home for technology businesses that care about logistics.” – The Descartes Systems Group Inc. (DSG) CEO, Edward Ryan


A proprietary database is a competitive advantage in supply chain management software

“Another consequence of sanctions is that businesses need to research and alter their supply chains to find businesses and companies that may continue to supply still economically viable. When businesses are doing this kind of research, they're often relying on our tariff and duty database and calculators and looking at our inventory of historic trading activity to determine their alternatives. We continue to see a complex and changing international trade environment right now, which is driving more and more customers to use our global trade intelligence solutions.” – The Descartes Systems Group Inc. (DSG) CEO, Edward Ryan


Return on Equity is the key metric to evaluate the performance of financial companies

“Underlying return on equity of 15.5% reflected the strong earnings in the quarter, approaching our medium-term objective of 16% plus. As mentioned earlier in my comments, capital also remained solid in the quarter, and we were pleased to announce a $0.03 increase to our common share dividend. Slide 5 provides just a few examples of business initiatives that drove our client impact strategy in the third quarter. In September, we announced our intention to acquire a majority stake in Advisors Asset Management, or AAM, a leading independent U.S. retail distribution firm.” – Sun Life Financial Inc. (SLF) President and CEO, Kevin Strain


…as well as growth in book value per share

“Excluding impacts and other comprehensive income, book value per share was up 7%. We continue to maintain a solid capital position with LICATratios of 129% at SLF and 123% at SLA. The Q3 leverage ratio was 26.4%. With the announced redemption of $400 million of subordinated debt in Q4, pro forma leverage is 25.6% and SLF LICAT ratio is 127%. Now let's turn to our business group performance starting on Slide 10 with MFS.” – Sun Life Financial Inc. (SLF) Executive Vice President and CFO, Manjit Singh


Customer retention and repeat business drive strong organic growth in the services sector

“Our service excellence culture drives customer retention, repeat business and word-of-mouth referral and our high single-digit organic growth for the quarter and year-to-date is a reflection of that. Total revenues for the quarter were up 13% over the prior year with organic revenue growth at 8%, balanced about evenly between our 2 divisions, EBITDA for the quarter was $95.5 million, up modestly from 2021, reflecting a margin of 9.9% compared to 11.1% in the prior year. – FirstService Corporation (FSV) CEO, Scott Patterson


…as well as software companies

“While revenue from new acquisitions, including the recently completed XPS acquisition, contributed nicely to this growth, similar to the first quarter, growth in revenue from new and existing customers from our existing solution set were the main drivers for growth this quarter when compared to last year.” – The Descartes Systems Group Inc. (DSG) CFO, Allan Brett


Disciplined capital deployment

“In terms of our tuck-under acquisition program, we have remained steadfastly disciplined with what we are willing to pay for potential targets in the face of aggressive competitive bidders, and this has tempered our activity during 2022.” – FirstService Corporation (FSV) CFO Jeremy Rakusin


…and high hurdle rates for reinvestment 

“We strive to be prudent and opportunistic with all of our investment dollars, whether deployed for organic growth purposes or towards acquisitions to meet our return on investment expectations. We did see some modest acquisition activity during the quarter. – FirstService Corporation (FSV) CFO Jeremy Rakusin


…combined with reasonable stock-based compensation expenses create tremendous shareholder value over time

“And finally, after incurring stock-based compensation expense of $6.5 million in the first half of the year, we currently expect this compensation will be approximately $7.5 million for the balance of this year, subject to any forfeitures of stock options or share units. I will now turn it back over to Ed to wrap up with some closing comments and our baseline calibration for Q3.” – The Descartes Systems Group Inc. (DSG) CFO, Allan Brett


Companies mentioned:


GDI Integrated Facility Services (GDI)

Q3 Revenue Growth: 38.0% |  Q3 EPS Growth: 12.6%


Enbridge Inc. (ENB)

Q3 Revenue Growth: 0.9%  |  Q3 EPS Growth: 87.0%


The Descartes Systems Group Inc. (DSG)

Q2 Revenue Growth: 17.6%  |  Q2 EPS Growth: -10.0%


Sun Life Financial Inc. (SLF)

Q3 Revenue Growth: 1.4%  |  Q3 EPS Growth: -54.2%


Gildan Activewear Inc. (GIL)

Q2 Revenue Growth: 6.0%  |  Q2 EPS Growth: -11.6%


FirstService Corporation (FSV)

Q3 Revenue Growth: 13.1%  |  Q3 EPS Growth: 25.2%


These are quotes from just some of the more than 60 Canadian companies we cover at 5i Research. To view their recent reports you can search for their tickers in the Reports section. If you are not a member and would like to gain access to these reports as well as the Q&A service where you can ask and search questions on these companies, you can fill in your information below to sign up for a free trial.

Take Care,

5i Research Team Signature

Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in the securities mentioned.



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